When paying for a latte -- or any menu item -- at Coupa Cafe in downtown Palo Alto, customers have two options.

One is the usual route: use cash or a card to pay. The second option? Pull out a smartphone and use an application to pay with bitcoins.

Bitcoins are an emerging digital currency. Generated electronically by computers, they can be exchanged freely between people without any intermediary. Without bank or government involvement, there are no chargebacks, prerequisites, fees, limits or delays.

"It's like when the Internet first started in the '90s," said Mike Landau, a Facebook software engineer who helped develop the technology that Coupa uses to accept bitcoins. He collaborated on the e-currency system with his close friend, Jean Paul Coupal, who owns Coupa Cafe with his mother and sister. Coupal and Landau met as undergraduates at Stanford University.

At the advent of the Internet, people understood phone-to-phone or computer-to-computer communication, but an entire decentralized network where people could connect, exchange and communicate was hard to comprehend, Landau said. The world of bitcoins is similar.

"Bitcoin does two things," Landau explained. "One is, it's a currency. But it's also a medium of transaction. You can imagine it being kind of like PayPal, but completely open source and decentralized. There's no one company that's in charge."

Like with PayPal, bitcoin users have an account, called a wallet (though it's a completely virtual one). Wallets are completely public but also anonymous, only connected to a user's "address," an encrypted string of letters and numbers. Users can have as many wallets as they'd like and can link them to bank accounts.

Users can buy and sell bitcoins on platforms such as Coinbase, a San Francisco-based company that allows consumers and merchants to exchange the currency. As of this week, there are more than 11 million bitcoins in circulation, a number that is steadily growing. The price of one bitcoin hovered around $97 this week, a dramatic number compared to less than a year ago. Last August, the exchange rate fluctuated between $9 and $10.

Users store bitcoins in their wallet and, similar to online banking, can send payments to other bitcoin users. When a payment occurs, other users within the network, called "miners," verify it. The entire exchange is permanently stored in the network.

"When you send bitcoin to someone you need to tell the network the transaction's numbers where you received the bitcoins you're sending," Landau explained.

"They check that those transaction numbers have not been completely used up. In short, they are checking that all incoming transactions to your wallet minus all outgoing transactions remains positive. If it does, they confirm the transaction."

Participating miners are given new bitcoins for verifying transactions, which has the effect of bringing new money into the market and rewarding people who help the network, Landau said.

At Coupa Cafe's Ramona Street location -- the only one so far that accepts bitcoins -- customers who want to pay with bitcoins observe the same protocol.

At the cash register, the price of an order is quoted in both dollars (in black) and bitcoins (in green), just as if it were dollars and euros, Coupal said. To the right of the register is a small laminated card with Coupa's QR code, which is a two-dimensional barcode that looks like a square black and white maze of pixels. Customers use a bitcoin app called Blockchain to scan the QR code, which automatically enters Coupa's address.

Customers type in the desired payment amount and click "send." Instantaneously, a message appears on the screen of a smartphone propped on a stand behind the register: "You have received a bitcoin." This phone's sole purpose is to provide a stream of live bitcoin transactions for Coupa employees. As soon as a payment comes in, the employee behind the register can instantly verify it and close it out as a specific tender, just like choosing cash versus credit, in the cafe's system.

Though as of now Blockchain only works with Android phones (Apple is still reportedly wary of bitcoins), iPhone users can go through the same process on a browser, but have to either manually type in Coupa's address or copy and paste it.

Coupa has done more than $200 worth in bitcoin transactions since launching the system about a month ago, a good number considering most of the purchases are typically small amounts, Coupal said.

As it's still a relatively new currency -- the original software was released in 2009 after a paper on bitcoins was written in 2008 by an anonymous hacker or hackers going by the pseudonym Satoshi Nakamoto -- the bitcoin exchange rate fluctuates daily. This week, a small iced tea -- $2.85 -- went for 0.044 bitcoins.

Bitcoins' value is also controlled by limiting the amount that is created every day. Every 10 minutes, 25 bitcoins are produced. After a certain number of years, that number will be halved, and halved again and again until about 100 years down the line, no more bitcoins will be created. The idea: make a volatile currency predictable.

"A lot of people are debating whether that's a good idea or not," Landau said of the limited production. "So it doesn't necessarily have to flatten out to be predictable, but they wanted it to have certain properties to encourage people to save and basically to have the currency become more valuable in time, and one way to do that is through reducing the amount that's produced."

Fewer than 10 places in the nation accept bitcoins for coffee, out of 11 food establishments/restaurants total, according to bitcoin.travel, a website that tracks real-world businesses across the world that use the currency.

Coupa Cafe is also the only brick-and-mortar business in Palo Alto that takes bitcoins.

Though such growth is exciting for techies and anti-government libertarians, Coupal predicted that as the currency gains traction, "the system will have to overcome the hurdle of more U.S. government involvement and oversight."

In May, California's Department of Financial Institutions sent a cease and desist letter to the Bitcoin Foundation, a nonprofit that works on bitcoin software development. The letter warned that the foundation's involvement in money transmission without registration with the U.S. Treasury or the California Commissioner of Financial Institutions is a violation of state and federal law. Bitcoin users also speculate that, because bitcoins are not only a currency but a mode of exchange for goods and services, the Internal Revenue Service could soon start taxing transactions.

[Portion removed.]
They are just bullying bitcoin with unwarranted remarks.
This article failed to clarify that the bitcoin foundation replied back and basically shut each of this ridiculous claims off completely.

Posted by Elwar
a resident of Palo Alto Hills
on Jul 21, 2013 at 11:32 am

"how do I follow the money?"

It is much easier to follow the money on Bitcoin than with government money. You simply go to blockchain.info and type in any address that is used in a transaction. From there you can see every transaction that has ever occurred with that address.

It is pseudononymous because all transcations are transparent to anybody. You make it anonymous by not tying your name to the purchase of your bitcoins.

Posted by william
a resident of East Palo Alto
on Jul 21, 2013 at 11:13 pm

Bitcoin is a ponzi scheme. Good for making illicit transactions, but you don't want to be left holding the bag when the bubble bursts. If you think the Winklevii are better stewards of your money then the federal reserve, then bitcoin may be for you.

Posted by Joe
a resident of Another Palo Alto neighborhood
on Jul 22, 2013 at 10:13 am

> It is much easier to follow the money on Bitcoin
> than with government money.

Government money is numbered. These numbers can be used to actually track the currency. These numbers can also be used to determine whether a bill is counterfeit, or not.

The government money is also backed up by the government (for better or worse). At least there is a known entity to deal with if there are problems with the currency. The government also mandates that the currency be accepted as "legal tender"--and must be accepted when debts are repaid.

The whole BitCoin "network" could evaporate overnight--and then where would the money be? Can you sue anyone for coding errors that result in fraudulent "bitcoins"? Can you force people to accept them?

The history of private currencies, which were prevalent here in the US up until the Civil War (at least), is nothing but a trail of tears and woe. Private banks would issue private currencies, which usually ended up being accepted only at a discount, and often ended up having no value when the issuing banks collapsed, for the typical reasons banks collapse--mismanagement and fraud.

The government currency works. It's not clear why we need another private, uninsured, and almost "underground" currency?

>Government money is numbered. These numbers can be used to actually track the currency. These numbers can also be used to determine whether a bill is counterfeit, or not.

In practice, cash is fairly easy to counterfeit and is a burden to businesses accepting large volumes of cash, especially when the goods for sale can be resold.

Electronic money is not traceable unless you are the government. In bitcoin, every party can trace any transaction to pseudonymous owners.

>The government money is also backed up by the government (for better or worse). At least there is a known entity to deal with if there are problems with the currency. The government also mandates that the currency be accepted as "legal tender"--and must be accepted when debts are repaid.

Nobody compels a small business owner to accept any money for any good or service. US taxes, however, can be paid with USD only. But what about the rest of the world? Wouldn't it be useful to have a nonpolitical currency that you could use regardless of the political leaning of the government that controls the geographic region? I think so. Especially on the internet.

>The whole BitCoin "network" could evaporate overnight--and then where would the money be? Can you sue anyone for coding errors that result in fraudulent "bitcoins"? Can you force people to accept them?

Bitcoin is entirely voluntary. If you don't trust the system, you don't have to use it. As a software developer, I trust bitcoin much more than my banks, credit card issuers and the private corporation called the Federal Reserve, which prints $85 billion dollars in new money each month.

>The history of private currencies, which were prevalent here in the US up until the Civil War (at least), is nothing but a trail of tears and woe. Private banks would issue private currencies, which usually ended up being accepted only at a discount, and often ended up having no value when the issuing banks collapsed, for the typical reasons banks collapse--mismanagement and fraud.

Well, yes, government does not tend to give up its privilege of seignorage very easily. However, looking back at other fiat currencies, there are no shortages of failures there as well: Web Link

>The government currency works. It's not clear why we need another private, uninsured, and almost "underground" currency?

Having a voluntary alternative appeals to people who want a free system that is not under the control of a single regime. "Free Money" if you will. Additionally, imagine the potential for cash transactions on the internet- no identity needed, just pay and go. Today that's impossible without a system like bitcoin. There are lots of other advantages but I'll leave it to other readers to lead their own research. Again, if you don't have a need for it, it's voluntary!

Posted by Joe
a resident of Another Palo Alto neighborhood
on Jul 23, 2013 at 8:31 am

> Regarding private currencies, that's what precious metals are for.

Bullion (or other forms of commodities) are not in any way "legal tender". No merchant (in the US) is required (by law) to accept your copper, or silver, bars/dust, in payment for goods and services.

Precious metals are more often seen as a hedge against the vagaries of public currencies--rather than a private currency.

If you can use your precious metals to settle your account somewhere--that's a private transaction. As long as both parties are satisfied with the conditions of the transaction, then it's a matter between the parties--and there is no requirement that a government sanctioned mode of payment be involved.

Posted by Joe
a resident of Another Palo Alto neighborhood
on Jul 23, 2013 at 8:39 am

> As a software developer, I trust bitcoin much more than my banks,
> credit card issuers and the private corporation called the
> Federal Reserve, which prints $85 billion dollars in new money each month.

Very interesting comment. How does being a software developer give you insight into these entities (banks, credit card companies, the Fed)? Did you take courses while you were in college that provided you information that other students weren't provided?

Since virtually everything in the financial world is now software-based, how is it that you trust people writing “bitcoin” software, but not people writing credit card/banking software?

Would you ever accept a job working for any of the enterprises you claim you don’t trust?

I stand corrected. After looking into it, the IRS office in San Jose says they will indeed accept cash currency (exact change required). And California accepts cash tax payments at an office in San Francisco. My main concern has been the movement towards mandatory e-file, involving third parties, security concerns, and additional costs, but that's a story for another thread.

Regarding private currencies, I'm not so much worried about what merchants are required to accept, as I am about what merchants are ALLOWED to accept.

>Very interesting comment. How does being a software developer give you insight into these entities (banks, credit card companies, the Fed)? Did you take courses while you were in college that provided you information that other students weren't provided?

I write software that moves money in the US, primarily using the card networks (VISA/MC) as well as through the ACH system, which is a federated system of banks and the federal reserve. I didn't get any knowledge of these systems in college, unfortunately.

>Since virtually everything in the financial world is now software-based, how is it that you trust people writing “bitcoin” software, but not people writing credit card/banking software?

There are two key reasons- 1) the bitcoin software is open source. Anyone can read it and learn how it operates. See Web Link for more details. 2) The cryptographic elements that protect bitcoin users are used in electronic banking, however all banks are built on a legacy system that relies on the trust of central authorities, not a publicly verifiable system that does not require trust between the parties. This is the key technological innovation that makes bitcoin valuable and enabled an economy to grow from $0.00 in value to approximately $1,000,000,000.00 in about 4 years.

>Would you ever accept a job working for any of the enterprises you claim you don’t trust?

Yes- I do work for "the man". I also support free software and believe that we shouldn't expect the existing banking system to be the best solution to our monetary needs as a culture.

Short story writers wanted!
The 33rd Annual Palo Alto Weekly Short Story Contest is now accepting entries for Adult, Young Adult (15-17) and Teen (12-14) categories. Send us your short story (2,500 words or less) and entry form by March 29. First, Second and Third Place prizes awarded in each category.